Friday, January 27, 2012

Focus and Leverage Part 79

As I told you in my last posting, I've asked Bruce Nelson to continue on the theme of performance metrics and Bruce is nearly finished writing his piece.  So today, while we're waiting for Bruce to complete his posting, I'd like to talk about metrics in general and although I've posted a similar piece, the key components of what makes a good metric are worth repeating.  I say this because your choice of performance metrics is critical to your long term and short term success.

Performance metrics are intended to serve some very important functions:

  1. Performance measure should de designed and selected based upon the behaviors you want  exhibited in your organization.
  2. Performance measures should reinforce and support the goals and objectives of the organization or company.
  3. The measures should be able to assess, evaluate, and provide feedback as to the status of people, departments, products, and the total company.
  4. Performance measures should be objective, precisely defined and quantifiable.
  5. The measures should be well within the control of the people and/or departments being measured and not some abstract number,
  6. Performance metrics must be understood and utilized by the organization as a whole and they must positively impact the system and not individual parts of it.
This last function, especially that they be understood and impactful to the system and not parts of it, is very important.  If people don't understand the metric, they simply won't understand the behaviors that are required to move it in the right direction.  I also believe that companies should develop a hierarchy of submetrics so that even people at the lowest rung in the organizational ladder will understand how their behavior drives the metric in the correct direction.  Let's look at an example.

Suppose your company has selected the performance metric efficiency and you are a production manager.  You're told that your performance appraisal is based upon how high your production unit's efficiency is.  If this was your mandate, how would you make this happen or what behavior would you exhibit to reach your highest performance.  And remember, your personal appraisal is based upon how high your unit's efficiency is.

If it were me in this position, I'd probably tell my boss that this isn't a good metric to measure me.  But most people would look at the metric and say to themselves, "If I want higher unit efficiencies, then I must run all of my process steps as fast as I can."  So what would that do to the unit?  Well, for one, it would drive efficiencies higher and put me in a position to get a good appraisal.  But what would it do to the organization?  Think about it.....if I run all of the process steps as fast as I could, what would be the organizational impact?  Would we produce and ship more product?  Would we spend less money?  What?

Quite simply, if you run all process steps as fast as you can, the net effect would be as follows:
  1. Your unit's efficiency metric would move to its highest level.....good for your personal appraisal.
  2. Work-in-process (WIP) inventory would grow larger and larger.
  3. Because WIP grows larger, cycle times become extended.
  4. Because cycle times become extended, on-time deliveries decreased proportionally to the level of WIP.
  5. Because on-time deliveries have decreased, customer satisfaction levels fall.
  6. Because customer satisfaction levels fall, sales will decrease.
Need I go any further?  Yes my friends, selecting the "right" performance metrics is critical to your long term survival so reason them out before you select them and above all else, make sure the metric has the total organization in mind.

Bob Sproull


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